This Just In ... Delaware Lawsuit

[WDSearcher]

Judge Rules in Favor of Disney Board (Hollywood Reporter)

Directors of the Walt Disney Co. did not breach their fiduciary responsibilities in approving the ill-fated hiring of Hollywood superagent Michael Ovitz as president in 1995, then granting him a $140 million severance package when he left just 14 months later, a judge ruled Tuesday. Chancellor William Chandler III said that while the Disney directors' conduct "fell significantly short of the best practices of ideal corporate governance," they did not breach their fiduciary duties or commit waste. "It is easy, of course, to fault a decision that ends in failure, once hindsight makes the result of that decision plain to see. But the essence of business is risk – the application of informed belief to contingencies whose outcomes can sometimes be predicted, but never known," Chandler wrote in a 175-page opinion. His decision closes a shareholder derivative trial that revealed the stormy inner workings of one of world's largest entertainment companies.

 

[Sarangel]

Here's the BBC's take on the whole affair:

Walt Disney has reported a 41% increase in profits at the same time as it wins a long-running court case brought against it by disgruntled shareholders.

The US giant thanked the big rise in quarterly profits on higher attendances at its theme parks and improved ratings at its television subsidiary ABC.

In the court case, a judge ruled Disney was right to award a $140m (£78m) severance package to a former director.

Michael Ovitz got that amount back in 1996 after only 14 months in the job.

The shareholders said Mr Ovitz had not deserved the money and wanted Disney to repay them the full amount, but the judge in Delaware rejected their arguements and found for the company.

Disney's net profits for its third quarter ending 30 June were $851m, compared with $604m for the same period a year ago.

Disney's theme parks have enjoyed increased attendance numbers

Profits at its TV station subsidiaries ABC and sports cable channel ESPN were up 48%.

ABC has benefited from hit shows Desperate Housewives and Lost.

Overall Disney revenues increased to $7.7bn from $7.5bn a year earlier, slightly below market expectations.

A lone blemish on the books came from Disney's movie studo group, which saw a $34m loss, mainly due to fewer video sales than a year earlier.

Outgoing Disney chief executive Michael Eisner is stepping down in September.

He has had a number of disputes with shareholders, including being blamed for both Mr Ovitz's appointment and then sizable severance deal.

 

[raidermatt]

Obviously the decision takes away some uncertainty and investors are going to view that as a positive. The stock is down today, most likely because revenue fell short of expectations. Revenue was up over last year, but not up by what was expected.

So we know the court ruled in the company's and directors' favor, but its "interesting" to read some of the commentary the court put into its ruling. The entire 180 page document can be found here:
Ovitz ruling

Here's some excerpts about the board at the time in general:

For the future, many lessons of what not to do can be learned from defendants’ conduct here. Nevertheless, I conclude that the only reasonable application of the law to the facts as I have found them, is that the defendants did not act in bad faith, and were at most ordinarily negligent, in connection with the hiring of Ovitz and the approval of the OEA.

Some definitions:
OLA = Ovitz letter agreement, "that outlined the basic terms of Ovitiz's employment".
OEA = Ovitz's employment agreement.

And here's some stuff about Eisner.

By virtue of his Machiavellian (and imperial) nature as CEO, and his control over Ovitz’s hiring in particular, Eisner to a large extent is responsible for the failings in process that infected and handicapped the board’s decisionmaking abilities. Eisner stacked his (and I intentionally write “his” as opposed to “the Company’s”) board of directors with friends and other acquaintances who, though not necessarily beholden to him in a legal sense, were certainly more willing to accede to his wishes and support him unconditionally than truly independent directors.

…Eisner obtained no consent or authorization from the board before agreeing to hire Ovitz, before agreeing to the substantive terms of the OLA, or before issuing the press release. Indeed, outside of his small circle of confidantes, it appears that Eisner made no effort to inform the board of his discussions with Ovitz until after they were essentially completed and an agreement in principle had been reached.

As a general rule, a CEO has no obligation to continuously inform the board of his actions as CEO, or to receive prior authorization for those actions. Nevertheless, a reasonably prudent CEO (that is to say, a reasonably prudent CEO with a board willing to think for itself and assert itself against the CEO when necessary) would not have acted in as unilateral a manner as did Eisner when essentially committing the corporation to hire a second-in-command, appoint that person to the board, and provide him with one of the largest and richest employment contracts ever enjoyed by a non-CEO. I write, “essentially committing,” because although I conclude that legally, Ovitz’s hiring was not a “done deal” as of the August 14 OLA, it was clear to Eisner, Ovitz, and the directors who were informed, that as a practical matter, it certainly was a “done deal.”

…Notwithstanding the foregoing, Eisner’s actions in connection with Ovitz’s hiring should not serve as a model for fellow executives and fiduciaries to follow. His lapses were many. He failed to keep the board as informed as he should have. He stretched the outer boundaries of his authority as CEO by acting without specific board direction or involvement. He prematurely issued a press release that placed significant pressure on the board to accept Ovitz and approve his compensation package in accordance with the press release. To my mind, these actions fall far short of what shareholders expect and demand from those entrusted with a fiduciary position. Eisner’s failure to better involve the board in the process of Ovitz’s hiring, usurping that role for himself, although not in violation of law, does not comport with how fiduciaries of Delaware corporations are expected to act.

Despite all of the legitimate criticisms that may be leveled at Eisner, especially at having enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom, I nonetheless conclude, after carefully considering and weighing all the evidence, that Eisner’s actions were taken in good faith. That is, Eisner’s actions were taken with the subjective belief that those actions were in the best interests of the Company—he believed that his taking charge and acting swiftly and decisively to hire Ovitz would serve the best interests of the Company notwithstanding the high cost of Ovitz’s hiring and notwithstanding that two experienced executives who had arguably been passed over for the position (Litvack and Bollenbach) were not completely supportive. Those actions do not represent a knowing violation of law or evidence a conscious and intentional disregard of duty. In conclusion, Eisner acted in good faith and did not breach his fiduciary duty of care because he was not grossly negligent.

 

[BRERALEX]

"By virtue of his Machiavellian (and imperial) nature as CEO, and his control over Ovitz’s hiring in particular, Eisner to a large extent is responsible for the failings in process that infected and handicapped the board’s decisionmaking abilities. Eisner stacked his (and I intentionally write “his” as opposed to “the Company’s”) board of directors with friends and other acquaintances who, though not necessarily beholden to him in a legal sense, were certainly more willing to accede to his wishes and support him unconditionally than truly independent directors. "

I think this judge knows whats he's talking about. I love to hang back and lurck and just enjoy the exchanges on this site. But it's sad I don't see anyone coming to the big ME's defense here. I usually see a couple of people defending any move he makes but this thread has tumbleweed running through it. Enjoy the silence I guess.

 

[DVCconvert]

Directors of the Walt Disney Co. did not breach their fiduciary responsibilities in approving the ill-fated hiring of Hollywood superagent Michael Ovitz as president in 1995, then granting him a $140 million severance package when he left just 14 months later, a judge ruled Tuesday. Chancellor William Chandler III said that while the Disney directors' conduct "fell significantly short of the best practices of ideal corporate governance," they did not breach their fiduciary duties or commit waste.

This decision not only harms the shareholders of TWDC -- but publicaly held companies in general.

IMHO, TWDC DID in fact fail in safe-guarding the shareholders interest, and while the BOD shoud not be held liable for legitamite errors -- no one in their right minds should have seen this ( Ei$ner hiring his buddy) as an 'error'.

 

[raidermatt]

I agree, Mr. Convert, but unfortunately the standard as defined in Deleware is pretty high.

Still, an important thing to note about the commentary in the ruling is that it is based on events that happened about 10 years ago. Its not directed at a CEO who stayed on a little too long, as many suggest is the case with Eisner, but rather at a CEO who was already "skirting" the intent of various controls long ago.

 

[FrozenTundra]

I wonder if Roy feels just as insulted as ME does ? After all, the man who 10 years after the fact brings the lawsuit was also sitting on the BOD.

 

[DancingBear]

...no one in their right minds should have seen this ( Ei$ner hiring his buddy) as an 'error'.

Eisner's cavalier attitude toward the Board was wrong, and his evaluation of the transferability of Ovitz's skills to Disney was flawed, but Ovitz was a lot more than Eisner's "buddy"--he was one of the most powerful men in Hollywood.

 

[DancingBear]

I wonder if Roy feels just as insulted as ME does ? After all, the man who 10 years after the fact brings the lawsuit was also sitting on the BOD.

This lawsuit was not brought by Roy, but by various shareholders.

 

[raidermatt]

I wonder if Roy feels just as insulted as ME does ?

Given the relative levels of hand-slapping doled out by the judge, I don't see how he could be. One part of the problem was Eisner not consulting with the board until things were nearly completed. Another was the way Eisner had stacked the board.

Sure, ALL of the board members can share in some blame here, but if we are looking for relative levels of responsibility, its pretty clear who is at the top of that list.

Ovitz was a lot more than Eisner's "buddy"--he was one of the most powerful men in Hollywood.

So noted, but that doesn't really change anything from a practical point of view. Sure, legally there is a difference between making a bad decision and intentionally setting your buddy up for life, but in the end, its still a $140 million out of the company coffers. Whether its because of cronyism, incompetence, a desire for power, or some combination thereof, doesn't matter that much when evaluating somebody's performance.

 

[DancingBear]

Whether its because of cronyism, incompetence, a desire for power, or some combination thereof, doesn't matter that much when evaluating somebody's performance.

Nope, but it does make a difference in determining whether they violated their fiduciary duties.

 

[raidermatt]

Nope, but it does make a difference in determining whether they violated their fiduciary duties.

Obviously, given the judgement in the case. (In Delaware, at least)

Convert expressed his/her disagreement with the decision, which isn't the first time somebody has disagreed with a court's decision. Regardless, we know what the court ruled. The point of bringing up the commentary was to dig a little deeper, and see what an assumed unbiased and knowledgable third party has to say about how Eisner ran things a decade ago.

 

[FrozenTundra]

This lawsuit was not brought by Roy, but by various shareholders.

I was mixing this lawsuit up with the one Roy & Stan started over the selection of Iger.

They all start to blend together after awhile.

 

[raidermatt]

In fact, Roy and Stan were asked to testify a second time because some viewed their original testimony (given when members of the board) as contradictory to the public statements they were later making (as part of the SaveDisney campaign).

San Diego Union

Ex-Disney board members to give new depositions in Ovitz lawsuit

By Gary Gentile
ASSOCIATED PRESS
12:40 a.m. June 2, 2004

LOS ANGELES – Former Walt Disney Co. board members Stanley Gold and Roy E. Disney have been ordered to give new depositions in a shareholder lawsuit against the company over the brief tenure of former Disney president Michael Ovitz.

A Delaware judge gave the law firm representing shareholders in that lawsuit permission to take new depositions from the two because of inconsistencies in their pre-resignation testimony and their post-resignation criticisms of the Disney board.

The two were members of the board in 1995 when they approved the hiring of former Hollywood agent Ovitz as Disney president. They were also on the board little more than year later when Ovitz left with a severance package that included a $38.9 million cash payout and stock options valued at more than $100 million.

Gold gave a second deposition last week and Roy Disney is set to testify again this week, said Steven Schulman, an attorney representing shareholders in the lawsuit.

The complaint claims the Walt Disney Co. board – including Gold and Roy Disney – was negligent in not consulting an expert before approving Ovitz's employment contract and that Disney Chairman Michael Eisner allowed Ovitz, a close friend, to collect a severance payment to avoid personal embarrassment.

Roy Disney gave a deposition in the case last June, and Gold testified last October. Both said they fully supported Eisner's courting of Ovitz. They also said they supported the decision to terminate Ovitz on a no-fault basis.

After their resignations last fall, Gold and Roy Disney embarked on a campaign to oust Eisner and attacked the Disney board for being Eisner's "rubber stamp" during a time period that included Ovitz's brief stint as company president.

In one document, posted on their "SaveDisney" Web site, Michael McConnell, managing director of Shamrock Holdings, a private company that manages Roy Disney's investments, said the hiring of Ovitz "foreshadowed the current 'poor governance' culture and Michael's (Eisner) disconnect with the people for whom he works; the shareholders.

"The company image has suffered long-term damage and the board has yet to design a succession process or plan that gives investors comfort," McConnell wrote.

Gold is the head of Shamrock.

Papers filed in connection with the shareholder lawsuit were also cited by state pension funds as one reason to withhold their votes for Eisner's re-election to the board in March.

The public campaign waged by Gold and Roy Disney prompted lawyers in the shareholder lawsuit to ask for permission to take new testimony from the two.

Lawyers representing Gold and Roy Disney had argued that their later public statements did not contradict their earlier testimony.

A trial in the lawsuit is scheduled to begin Oct. 18.